In 2016, a number of office markets in the United States will face major challenges specific to limited large block space. Large blocks are defined as square footage of 100,000 or more of contiguous space.
As reported by CBRE Group, an increase in office demand, coupled with a stronger economy and new construction activity being slower to commence compared to earlier cycles, has caused a decline in available large blocks of space for office use for many US markets. For tenants interested in large footprints, this creates several unique challenges.
Although construction activity has increased in recent months, the new supply may not actually provide relief to all US markets. For instance, in the third quarter of last year, the fewest total of large blocks for downtown markets available in under construction and existing buildings was in Midtown South Manhattan, New York, San Francisco, California, and Philadelphia, Pennsylvania.
Specific to existing buildings, tenants needing large block space only have five viable options in Philadelphia and Seattle, and four in San Francisco. These numbers represent the lowest for both suburban and downtown markets. However, because there is 2.6 million square feet of large block space for buildings under construction in Seattle, this city should get relief from the current shortage of supply.
Although a number of constrained downtown office markets do have new construction projects underway, heavy pre-leasing activity could mean that the increased supply is still not enough to meet high demand posed by users of large block space.
Highest and Lowest Available Space
Close to all of the space becoming available in San Francisco in 2016 is already pre-leased. However, over the next six months in Chicago, available large blocks of space are expected to decrease because of the in-migration of tenants from suburbs and the quick expansion of technology. For Atlanta, a single large block is under construction.
Now, for markets with active development such as Midtown and Downtown Manhattan, Boston, and Seattle, an increase in the number of available large blocks is likely, this amid government and law firm downsizing, coupled with tenants associated with the federal government continuing to move into space owned by GSA.
Suburban markets of Orange County, California and Denver, Colorado have the least number of options for large blocks of space in existing buildings. In addition, these same markets have few new blocks under construction. Orange County and Denver, along with Chicago and Boston, account for the smallest amount of square footage in large blocks as a percentage of inventory that currently exists.
On the other hand, suburban markets in Washington, DC have the highest combined number of inventory, followed by Northern Virginia and suburban Maryland. Even though some US markets have available blocks of space and the economy is improving, rent levels simply do not justify new construction, especially when considering the rising cost of development.
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